I had wanted to follow up the post of yesterday by outlining some practical strategies that investors might follow in order to mitigate the risks associated with MF investments through SIP in a highly volatile market over years. However, on seeing a few posts in Facebook groups which are clearing misleading people, it seemed to me that it will be worthwhile to spend some time in giving a concrete example.
Before I do that, let me state the surmise of the arguments presented by people who want others to continue doing SIP as if nothing has happened. Firstly, it is said that over the long term the market volatility will cease to matter. For example, if you look at an MF performance for the last 20 years or so, this can be demonstrated. As an academic exercise this is intellectually flawed as it takes only one set of data point available for the Indian markets. As a practical advise, it is useless for doing the same thing when situations have changed dramatically, without any reassessment of the situation, is hopelessly inadequate. Secondly, the crux of the argument is equities are still the best bet, even if the XIRR of your investments done through SIP is in deep red. This seems completely lopsided to me. Simple reason is this – money does not have a different class based on the asset class it is invested in, you need to base your investment decisions on a clear basis of asset class relative returns, not on some romantic notions propounded by blog writers.
So let me take an example in the real world to show you how there is an impact. We will take a situation where a person starts investing in 2008, so that his money has had the best chance to grow through SIP. The following is the example background:-
- In 2008 Ravi wanted to invest in MF through SIP for his son Ajay who was 3 years old at that time. Ravi estimated he would need the money in 15 years, which was sufficiently long term for equity returns to do well.
- Estimated costs in 2008 for an Engineering course in a private college was 5 lacs. Ravi took 12 % educational inflation and arrived at a cost of 27.36 lacs in 2023, when he would need the money for Ajay.
- His planner told him that with a 12 % XIRR, he would need to invest 5478 Rs per month in order to reach his goal.
- Ravi started his investment in mid 2008 by doing an SIP of 5500 Rs in a popular diversified equity fund, which seemingly had the least volatility when compared to it’s peers.
Most of us know what happened to the markets from 2008 till today so I will not get into details regarding those. For much of the time Ravi had concerns about getting a 12 % XIRR but his worries were allayed greatly in 2014 when the spectacular rise in the markets made him think that he will achieve his targets 2-3 years earlier.
Cut to the present – let us see how things stand now and how will it affect the future.
- From 2008 till now, the XIRR of his fund has been a mere 7 % and this may actually get worse in the coming months.
- His investment value is currently pegged at 6.52 lacs, assuming 71/2 years of investment time.
- If we take his son’s age to be 10 1/2 years now and start with a base figure of 6.52 lacs, how much will Ravi need to invest if he has to reach the goal of 27.36 lacs in the next 7 1/2 years?
- If Ravi still assumes a growth of 12 % his monthly SIP will be 8362 Rs.
- If he is more conservative now and wants to take 10 % XIRR for the current value growth and future SIP then he will need to put in 10538 Rs every month.
This is the impact in real financial terms, never mind what people tell you otherwise. You need to do this exercise for yourself in order to understand how you have been impacted and how your investment needs to change in future for achieving your goals.
In the next post I will get back to what can possibly be done for existing investors.